After months of delay, Pentagon told to plan for "fiscal cliff"

WASHINGTON (Reuters) - The Pentagon said on Wednesday the White House budget office has directed it to begin planning how to implement billions of dollars in across-the-board spending reductions if Congress and the president fail to agree to avert the cuts before January 2.

The decision reversed the Pentagon's yearlong position that it was not planning for the automatic cuts, known as sequestration. The cuts were included in last year's Budget Control Act because officials thought the process was so onerous it would force rival political parties to compromise.

But no spending deal was reached. With the automatic cuts now looming January 2, Pentagon spokesman George Little said the department had been directed by the White House Office of Management and Budget to begin "internal planning" for the reductions.

"Naturally we hope very much that sequestration will be avoided," Little said. "We don't want to go off the fiscal cliff, but in consultation with OMB we think that it is prudent at this stage to begin at least some limited internal planning."

The OMB instruction comes as the White House and lawmakers are engaged in a last-ditch effort to find an alternative package of revenue increases and spending cuts that would enable them to avoid the $1.2 trillion in automatic across-the-board cuts required under sequestration, part of the so-called fiscal cliff.

Nearly half of the automatic spending cuts would fall on the Pentagon. The $500 billion would be in addition to the $487 billion in cuts to defense spending mandated in the Budget Control Act. The department began implementing those reductions in its 2012 budget.

Civilian employees of the Department of Defense are likely to be among the earliest to feel the cuts, according to an analysis by Todd Harrison of the Center for Strategic and Budgetary Assessments, a national security think tank.

He estimated in a report in August that as many as 108,000 civilian employees of the department could lose their jobs in the weeks immediately after sequestration goes into effect. The president has exempted military salaries from the spending cuts.

Little said Pentagon planning was still at an early stage and he wasn't sure yet when the department would begin communicating with employees but it was committed to do so as soon as there was a better understanding what would happen.

He said a communications task force was being established to keep the department's 3 million workers -- about one in every 100 Americans -- informed about how the spending cuts would affect them and their jobs.

"Our intent is to not implement sequestration in an absurd way internally inside the Department of Defense," Little said. "So we expect to, through our planning efforts, identify not just numbers but how we communicate to our 3 million person work force and prepare them for what may come down the pike."

While the impact on Pentagon employees is a top concern, the department may also begin looking at the effect of the cuts on weapons programs and other spending.

"Personnel ... certainly is something that is of serious concern to me. But I wouldn't rule out that we're looking at other areas as well," Little said. "I think it would make sense for us to look at the full landscape of what might be affected inside the department if sequestration were to occur."

The Pentagon is also concerned about how the cuts could affect the new U.S. defense strategy it unveiled in January and began implementing over the past year.

The strategy calls for a shift in focus to the Asia-Pacific region. Defense Secretary Leon Panetta has warned that deep additional cuts to the budget could undermine the new strategy and force Pentagon planners to go back to the drawing board.

"We're very concerned that sequestration could have a devastating effect overall that would require us at least temporarily to throw out the strategy that we have so carefully put in place over the past year," Little said.

"That's something that we really want to avoid. This defense strategy is the right one for this department going forward. It's right for our military."

(Reporting By David Alexander; Editing by Eric Beech and Cynthia Osterman)